Inclusive business model principles - Session 4
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The background and guidelines for delivering these PowerPoint presentations can be found in the facilitator’s manual: http://www.fao.org/3/a-i7968e.pdf http://www.fao.org/economic/esa/ This session introduces principles to be used as reference when analysing diverse types of business models. Trade-offs sometimes have to be made if a business model that is inclusive of smaller, inexperienced actors is expected to generate profits and grow. The principles presented in this session allow for an analysis to be made on the inclusiveness and competitiveness of a business model, bringing these trade-offs to the surface for more informed decisions. © FAO: http://www.fao.org
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Inclusive business model principles - Session 4
- 1. Inclusive business models www.fao.org/economic/esa/ © FAO, 2017 Inclusive business model principles SESSION 4
- 2. Inclusive business models 2 IBM principles Session 4 Inclusive business model principles 1. Is the business model inclusive? 2. Is the business model competitive?
- 3. Inclusive business models 3 IBM principles Session 4 Inclusive business model principles Trade-offs have to be made to: 1. Include small, inexperienced actors 2. Generate profits and grow
- 4. Inclusive business models 4 IBM principles Session 4 Inclusive Principles
- 5. Inclusive business models 5 IBM principles Session 4 1. Inclusion of actors • What actors are included? • What experience and knowledge of actors does the BM use?
- 6. Inclusive business models 6 IBM principles Session 4 2. Inclusion of diverse market outlets • What type of business linkage has been established between actors? • Does the business model encourage small actors to find a range of market outlets or does it increase dependency on one buyer?
- 7. Inclusive business models 7 IBM principles Session 4 3. Inclusion of partners • With what type of partners does the BM work? • Do any of the partners dominate the business model? Or is there shared decision-making?
- 8. Inclusive business models 8 IBM principles Session 4 Competitive Principles
- 9. Inclusive business models 9 IBM principles Session 4 4. Managing business strategically • Does the BM encourage efficiency (e.g. quality, timely delivery, payments)? How? • Do the actors involved earn enough?
- 10. Inclusive business models 10 IBM principles Session 4 5. Business-to-business collaboration • In what way do the main actors in the BM collaborate? • Are there mechanisms aimed at improving collaboration between buyers and sellers?
- 11. Inclusive business models 11 IBM principles Session 4 6. Responding to customer needs • Do the main actors have the business and technical skills to respond to customers’ needs? • Does the business model or partners support capacity building for responding to customers’ needs?
- 12. Inclusive business models 12 IBM principles Session 4 Questionnaire for assessing IBM principles • This tool provides a visual representation of the business model based on the IBM principles. • Steps: 1. Pose indicated questions to producers and buyers 2. Compare answers and gain an overall idea of the business model 3. Identify areas of improvement IBM Principles tool
Editor's Notes
- This session introduces principles to be used as reference to analyse diverse types of business models. Trade-offs sometimes have to be made if a business model that is inclusive of smaller, inexperienced actors is expected to generate profits and grow. The principles presented in this session allow for analysis on the inclusiveness and competitiveness of a business model, bringing these trade-offs to the surface for more informed decisions. Outputs Participants will be able to: Understand that there are tradeoffs between inclusiveness and competitiveness. Analyze business models based on their degree of inclusiveness and competitiveness. Reflect on how there is no standard ideal business model. Each business has to adapt to specific circumstances, but there are some characteristics that make business models more inclusive and competitive.
- The inclusive and competitive principles provide a framework to analyse business models using two sets of principles. The ‘inclusive’ and ‘business’ elements of an ‘inclusive business model’ can be competing forces. The ‘inclusive’ element of a business model relates to the constraints of linking smallholders and vulnerable groups to buyers. The ‘business’ element relates to an enterprise’s way of doing business and its viability. The inclusive and competitive principles provide a framework to analyse business models and reflect on how they could be improved. The inclusive and business elements of an IBM can be competing forces. The “inclusive” element of a business model relates to the constraints of linking smallholders and vulnerable groups to buyers. The business” element relates to an enterprise’s way of doing business and its viability. Trade-offs sometimes have to be made if a business model, inclusive of smaller inexperienced actors, is expected to generate profits and grow. The business element needs business thinking and tools to be mainstreamed to strengthen the competitiveness of business models. Models driven solely by either the public or private sector can result in poorly coordinated markets if there is little private sector involvement or further market exclusion for vulnerable groups if the public sector is not involved. The principles described below guide actors in designing or implementing the upgrading of smallholder-based business models so that they result in competitive models and, at the same time, contribute to poverty reduction and food security.
- The inclusive and business elements of an ‘inclusive business model’ can be competing forces. The ‘inclusive’ element of a business model relates to the constraints of linking smallholders and vulnerable groups to buyers. The ‘business’ element relates to an enterprise’s way of doing business and its viability. The ‘business’ element requires that business thinking is mainstreamed and that support is focused on strengthening the competitiveness of a business model. But promoting competitive business models alone cannot be depended upon to reduce poverty as overreliance on the private sector may result in poorly coordinated markets and further exclusion of marginalized group Trade-offs sometimes have to be made if a business model, that is inclusive of smaller inexperienced actors, is expected to generate profits and grow.
- The inclusive principles contain a series of questions to analyze how inclusive a business model is. WHAT PRINCIPLES MAKE A BUSINESS MODEL INCLUSIVE? Inclusion of existing value chain actors Activities should, as far as possible, avoid being over-interventionist in the chain and instead tap into existing business linkages and knowledge of value chain actors that have already built up relationships with each other. Intentionally excluding existing actors, such as traders, transporters, SMEs, village agents and wholesalers that perform an essential economic role in a business model could unduly undermine local market dynamics and adversely impact on the overall competitiveness of a chain. Farmer organizations can be encouraged to take on the roles of other value chain actors such as traders or agroprocessors, but only when they already excel at their core functions of providing essential services to members, are equipped with a competitive advantage and have the appropriate skills to compete in an additional part of the chain. To demonstrate project results or accelerate progress, NGOs and project teams may also sometimes take over value chain activities. An NGO, for instance, might negotiate contract terms with a buyer rather than providing the mentoring to a farmer organization to carry out this function. Interventions should therefore build on the knowledge of existing actors and include them in inclusive market development by bringing in partners to address their challenges in procuring or providing services to smallholders. Inclusion of less endowed actors Inception interventions should target the participation of the most committed and capable farmers to give the business model the best chance of success. The section on good practice guidance tips (second subheading) refers. As the model progresses and best practices and lessons are learned, opportunities can be made available to actors with fewer assets, such as youth, women and minority groups. Inclusion of diverse market outlets Building up a long-term relationship with a buyer is good practice since smallholders can consolidate their experience and confidence by working with a demanding buyer while also benefiting from the provision of inputs and services. However, as more smallholder suppliers are integrated into the business model, the learning gained should also eventually allow for the identification of additional market outlets and the dissemination of upgraded skills to the rest of the sector. Another alternative is to allow farmers to continue to sell part of their produce to traditional markets, which is a good practice often adopted in contract farming schemes. It allows farmers to avail of extra services and a regular buyer with the option of taking advantage of higher local market prices. Inclusion of right partner mix Smallholder-based business models typically have a main driver as described in Chapter 2. These models are producer driven, buyer driven, public sector driven or intermediary driven. Overdominance of any of these actors in the chain can affect either the inclusiveness of the business model or its competitiveness. For example, if the business model is dominated by an NGO, the poverty dimension may compromise the viability of the model. Alternatively, a model dominated by the buyer, under a contract farming scheme for example, may ignore local poverty-related concerns or food security. It is therefore important that appropriate space be allocated to partners that may not be driving the model but can provide complementary services and advice. Box 4 gives criteria for improving inclusiveness in a business model.
- Are actors already active in the Business Model? Do actors perform activities that they have the skills and capacities for perform? For example, are FOs encouraged to process when they don’t have the proper capacities or equipment to do it? Is there any actor who is excluded? E.g. traders, FOs, financial institutions. IBMs should, as much as possible, tap-into existing business linkages and knowledge of value chain actors that have already built up relationships with one another. Excluding existing actors such as traders, transporters, SME’s, village agents and wholesalers that perform an economic activity within a business model should be avoided. Criteria for inclusive business models An IBM: provides a living wage for vulnerable groups, such as smallholder groups, small enterprises, women- and youth-run enterprises, while also enabling buyers to profit; uses flexible trading arrangements that make it easier for smallholders or MSEs to supply a buyer, such as cash on delivery, accepting small consignments, providing reliable and regular orders; supports farmers and small enterprises to establish a stronger negotiation position through skills development, collective bargaining and access to market information and financial services; builds on the skills and expertise of existing market players, including traders and processors, and promotes value chain collaboration, transparency in pricing mechanisms, and risk sharing; is scalable in the medium-term so that the numbers of small actors involved can be increased and/or the type of business model can be replicated in other value chains or parts of the sector; allows for diversified income streams in the long term to enable the dissemination of upgraded skills to the rest of the sector, avoiding overdependence on any single buyer or market outlet.
- Over dependence by small actors on one market outlet should be avoided in the long-term. Building up a long-term relationship with a buyer is good practice, but the learning gained should be used to seek out additional market outlets and buyers.
- It is important that the appropriate space is allocated to partners that may not be driving the model but that can provide complimentary services and advice Competitive models take advantage of the expertise of a wide range of partners.
- These principles allow for evaluating whether or not a model promotes competitiveness and is sustainable over time. WHAT PRINCIPLES MAKE A BUSINESS MODEL COMPETITIVE? Managing a business model strategically The managers of both farmer organizations and buyers need to be equipped with a core set of agribusiness strategic management skills, such as marketing, finance, logistics, food safety and standards, storage and inventory management. Value chain projects typically provide capacity building for farmer organizations and SMEs in some or all of these areas. However, building up this expertise takes time, and it is unlikely that a small enterprise will have the in-house staff expertise to cover all these technical areas. If these core management skills do not exist within an enterprise or farmer organization, they will need to be outsourced to local business service providers and consulting firms. Business-to-business coordination There is a range of exchanges of produce, information and finance between a seller and a buyer that require continuous consultation. However, decisions are often unwittingly taken with little coordination, resulting in rejection of produce, wasted journeys, side-selling19 and conflicts over prices and volumes, among others. More attention to the interdependence of decisions can lead to an improvement in business-to-business coordination and the upgrading of respective business models. Developing good business relationships can take time, and requires regular communication to address problems and misunderstandings. Responding to customers’ needs To be competitive, business models need to respond to customers’ needs. Farmer organizations, NGOs and buyers advising smallholders have to understand the attributes of the product that is most valued by the end consumer, such as quality, quantity, delivery schedules and location. For instance, with a staple commodity such as maize, a food aid programme may prefer yellow maize because of its higher nutritional content. On the other hand, white maize is more in demand by local retail markets, ironically because of the food aid stigma attached to yellow maize. Such market insights need to be recognized and communicated to representatives of farmer groups and farmers themselves.
- The managers of both farmer organizations and buyers need to be equipped with a core set of agribusiness strategic management skills, for instance, marketing, finance, logistics, food safety and standards, storage and inventory management. If these core management skills do not exist within an enterprise or farmer organization, they can be outsourced to local business service providers and consulting firms.
- There are a number of exchanges of products, information and finance between a seller and a buyer which require continuous consultation. A competitive business has mechanisms to ensure continuous dialogue and coordination between actors.
- To be competitive, business models need to respond to end-customers’ needs. Farmer organizations, NGOs and buyers need to understand the attributes of the product that are most valued by the end consumer, such as quantity, delivery schedules and location.
- It may be useful to present the accompanying questionnaire created to assess the IBM Principles. It provides a visual representation of a particular business model based on the IBM principles. In practice, the questions are posed to both producers and buyers, after which results are compared and plotted on a spider-like diagram. Participants of the IBM training could be invited to see how the tool functions and how it can be applied to their own work in linking small value chain actors to buyers. Wrap-up the discussion observing that there is no ideal business model and that each organization has their own way of carrying out business influenced by the product they handle, the productive resources available, the business environment and the history of the company. Also note that it is hard for a business model to excel in all the principles. However, there are some characteristics that make business models more inclusive and competitive that could be promoted.